The U.S. Postal Service is spending more than intended to fly mail around the country because minimum volume commitments under its new air cargo contract with United Parcel Service prevent the agency from following a policy to shift more pieces to cheaper surface transportation to save money, the agency’s watchdog organization said.
Postal officials failed to align the UPS (NYSE: UPS) contract with projections for declining parcel volumes and a new strategy that prioritizes use of motor carriers over more expensive air shipping, the Office of Inspector General said in a report publicly released on Tuesday. To make up for fewer packages, the national post handed UPS more First-Class mail and marketing mail to avoid significant penalties for failing to meet minimum volume thresholds.
If the USPS didn’t supplement package volumes with mail, it would have paid an extra $127 million for unused air capacity.
The Inspector General urged logistics officers to consider early termination of the UPS air contract and pursue a deal with better conditions.
Part of the rationale for picking UPS, according to analysts, was that UPS could provide cheaper linehaul transportation by leaning more on its extensive intercity road network instead of its air fleet. While the contract is more favorable to the Postal Service than the previous one with FedEx, according to the Inspector General’s audit, the pressure to meet contractual minimums and avoid paying premiums has resulted in greater reliance on the air network to haul First-Class and marketing mail.
“The Postal Service did not properly forecast declining package volumes or impacts of subsequent network changes when establishing the volume requirements of its new air cargo contract” resulting in a decision to put more mail on planes “even though this contradicts previous decisions to extend delivery standards to allow more mail to move by surface — simply to meet contractual minimums and avoid even higher expenses,” the audit stated.
Cost initiative poorly implemented
As part of its Delivering for America transformation plan six years ago, the Postal Service moved to shift a large portion of mail and parcels to trucking contractors as a way of significantly decreasing the use of costly air transport and improving transportation efficiency at an organization losing billions of dollars annually. In October, 2021 it extended First-Class mail delivery standards by one-to-two days to allow more volume to travel by road and in 2024 replaced FedEx as its domestic air cargo provider, awarding UPS a contract with a base term of 5.5 years at an estimated annual value of $1.5 billion. The Inspector General now lists the contract’s total value at more than $10 billion.
Last year, the Postal Service further adjusted mail service standards to improve productivity, adding an extra day to First-Class delivery times by reducing truck trips to post offices located 50 miles or more from regional processing centers, while also shortening delivery times for bulk mail.
The agency estimated annual savings of $1.1 billion from surface transportation and $701 million from air transportation because of the transportation optimization initiatives.
The UPS contract uses a per-cubic foot pricing structure tied to average daily volume. The Postal Service guarantees a minimum average volume of cubic feet per day, with higher rates applying if volumes are a certain percent above or below the negotiated average. Specific volumes and percentages are blacked out in the report.
To help meet optimal contracted volume requirements and improve service, the percentage of First-Class mail with a three-to-five day delivery window traveling by air went from 2% in October 2024, when the UPS contract took full effect, to 50% by March 2025. In addition, the Postal Service began moving Marketing Mail — flyers, brochures, fundraising letters — by air beginning in March 2025, a product historically transported by truck, the Inspector General said.
The Postal Service has successfully reduced total transportation expenses in recent years, despite the increases in air transport, but exceeded management’s plan by about $200 million due to impacts from realigning the transportation network, including returning mail back to air in the second of fiscal year 2025, according to the organization’s annual report.
“While the Postal Service’s new air cargo contract delivered several important benefits, including lower rates, greater flexibility, and stronger service performance requirements, the full potential of these advantages was not fully realized as the volume requirements are not aligned with actual volume and operational realities,” the Inspector General said.
Prior to the UPS contract announcement in April 2024, Priority Mail volume declined by about 54%, and continued to decline by about 31% following the announcement, but instead of planning for a decline management forecast an overall 2% increase in average daily volume.
Postal Service management should conduct an updated cost-benefit analysis to determine whether terminating the current contract and pursuing a new air cargo contract with a shorter base term with option years would provide the needed flexibility to align with volume realities and changes to the ground transportation network, the audit recommended.
Postal leadership disagreed that shifting First-Class mail to air contributed to $200 million in additional costs as well as the need to perform an updated cost-benefit analysis of the air cargo network, saying the existing contract offers sufficient flexibility, it said.
“Flying First-Class mail has helped manage costs in our air network by maintaining a favorable pricing tier and improved service performance for First-Class mail. The increase in costs of the transportation network is primarily associated with our surface network and increasing rates,” Chief Logistics Officer Peter Routsolias, said in a response letter. “Shifting First-Class mail to surface would increase costs of both the surface and air networks and decrease service performance of the product. … The service standard changes and air contract have enabled the Postal Service to reduce transportation costs by over $1.7 billion between fiscal years 2023 and 2025.”
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